A common reason people file for bankruptcy relief is divorce. Divorce can cause a high financial crisis for one or both spouses. Moving from a two-income home to a one-income home can make paying bills and living expenses difficult. Even when you receive support payments, it might be challenging to make ends meet. Alimony and bankruptcy issues can be confusing. Seek legal advice from a qualified bankruptcy lawyer to protect your rights.
Four Alimony and Bankruptcy Facts You Need to Know
Whether you are paying alimony or receiving alimony, you need to know some critical facts about alimony and bankruptcy filings. Keep reading to find out four of the top things people need to know about alimony and bankruptcy.
1. Are Alimony and Spousal Support the Same Thing in Bankruptcy?
Some states continue to use the term “alimony” to refer to support payments between ex-spouses. However, many states opted to change the term to domestic support because alimony is generally associated with a husband making payments to an ex-wife. Therefore, alimony and spousal support are merely different terms for domestic support obligation.
The U.S. Bankruptcy Code defines domestic support in 11 U.S. Code §101(14A) as a debt owed to or recoverable by:
- Debtor’s child or the child’s parent, legal guardian, or responsible relative
- Governmental unit
The statute states that the nature of the debt is alimony, maintenance, or support assistance. When a debtor goes to court for their 341 Hearing, the Chapter 7 and Chapter 13 trustee asks whether the person owes any domestic support obligations (DSO). If so, the trustee verifies that information and the statute of the payments.
2. Alimony Is Income for the Bankruptcy Means Test
When you file for bankruptcy, you must complete a Bankruptcy Means Test. The means test serves several purposes.
In a Chapter 7 case, the means test compares your gross average income to the median income for your state of filing. If your income is below the state median income, you should qualify for a bankruptcy discharge. On the other hand, if you make more money than the state median income level, you must complete a second state to calculate your disposable income to ensure you qualify for a Chapter 7 bankruptcy discharge.
The means test in a Chapter 13 case determines whether you must file a 60 month Chapter 13 plan. Additionally, it calculates your disposable income. You must pay at least the amount of your disposable income to your unsecured creditors for the term of your Chapter 13 plan.
Most income is used to calculate gross income for the mean test. Only Social Security Income and a few other benefits are excluded from the means test.
3. Alimony Counts as Income for the Receiver
Alimony is counted as income on both the Chapter 7 and Chapter 13 means tests for the person receiving the payment. Therefore, receiving alimony payments could result in “failing” the means test if your income plus the alimony you receive increases your income above the state median level.
However, you could “pass” the test if your allowable monthly expenses decrease your disposable income below a specific amount. Disposable income is the amount of money you have each month after paying for utilities, food, clothing, shelter, transportation, medication, insurance, car payments, and other necessary living expenses.
4. Alimony Counts as a Deduction for the Payer
If you pay court-ordered alimony to your ex-spouse, you can deduct court-ordered alimony from your gross income on the means test. Therefore, this deduction could help you qualify for a bankruptcy discharge in Chapter 7. In a Chapter 13 case, paying alimony to an ex-spouse lowers your disposable income, which decreases the amount paid to unsecured creditors.
Alimony Cannot Be Discharged Under a Chapter 7 Case
Bankruptcy does not discharge domestic support obligations, including alimony or spousal support payments. If you owe past-due alimony payments, you still face penalties from the family court. Many states seize state income tax refunds, garnish wages, suspend driver’s licenses, and order other penalties for non-payment of alimony.
Filing Chapter 13 Can Help with Past Due Alimony Payments
Even though bankruptcy does not discharge your alimony or spousal support payments, you can pay the arrearage through a Chapter 13 plan. You may include your past-due spousal support payments in your Chapter 13 plan payment to be paid in full to your ex-spouse.
However, a condition of your Chapter 13 case is that you immediately begin making regular alimony payments to your spouse. If you fall behind on any future alimony payments, it is grounds for the dismissal of your bankruptcy case.
However, if you remain current with future alimony payments, filing Chapter 13 could prevent sanctions by the court for falling behind on spousal support payments.
Contact Ascend Today for More Information
Ascend makes it easy for you to explore your debt-relief options. Our free bankruptcy calculators help you determine whether you qualify for Chapter 7 bankruptcy or Chapter 13 bankruptcy. In addition, a member of our team can discuss other ways to eliminate debt, such as debt payoff planning and debt management.
Ascend provides free information and services to help you get out of debt quickly. Our only priority is your financial wellbeing. Contact Ascend online or by calling (833) 272-3631.